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Press release including overview tables [PDF]
Frankfurt, 4th January 2013 – News that the US government had finally reached a fiscal cliff settlement brought some initial cheer to financial markets worldwide at the start of the year, causing surges in Germany’s DAX and other European share indices. In the last days and weeks of 2012, business sentiment improved mainly as a result of the new bailout deal for Greece and the debt buyback achieved so far. Ratings agency S&P subsequently raised Greece’s rating six notches to B-minus from “selective default”. The economic outlook remains unstable, but a possible breakup of the eurozone now looks extremely unlikely. Germany remains a pillar of strength in these turbulent times: for instance, the ifo-index increased in December for the second time in succession, primarily due to an improvement in companies’ expectations. The generally moderate economic slowdown and, in particular, the stable labour market ensured that the office letting markets experienced only a slight decline over the year. Should GDP growth of 0.8% be achieved in 2013, the German property strongholds could expect to see stable take-up volumes this year; the five-year average of 3.0 million sqm would then be attained. “The extremely stable user market should provide a healthy basis for the investment market in 2013. In addition, interest rates remain low and are therefore still attractive for property investors,” says Dr. Frank Pörschke, CEO Jones Lang LaSalle Germany. Pörschke adds: “However, in order to enable the transaction activity to benefit from these factors, it is essential that both equity investors and debt providers broaden their perspective and relax their rigid focus on Core properties. Only then can there be significant growth in the investment volume.” Final spurt ensures the best result of the last five years As late as mid-December it still seemed likely that the economic uncertainties, financial bottlenecks and investors’ aversion to risk would prevent the 2012 transaction volume from reaching the previous year’s level. This situation did not materialise: a remarkable final spurt caused by the signing of some large lease contracts pushed the volume on the commercial property market to above €25 billion (€25.3 billion). This represented an 8% increase compared to the previous year. “The willingness of investors to sign deals before the end of the year provided a fantastic boost to the transaction volume. The 2013 increase in the land transfer tax in markets including Frankfurt was a decisive factor here,” says Timo Tschammler, Member of the Management Board Jones Lang LaSalle Germany. “We didn’t expect some of the transactions to be registered until 2013,” adds Tschammler. “That the transactions took place earlier is a statement of confidence in the German property market, particularly by those foreign investors that participated in the transactions at the end of the year.” Not least as a consequence of these transactions, investments by foreign buyers stabilised in 2012 compared to 2011. Foreign buyers accounted for a total share of around 42% of the transaction volume. One noticeable feature here was the focus on large-volume transactions. For instance, the four largest transactions – all portfolio transactions – with a combined volume of almost €3.5 billion were realised by foreign investors (from Norway, the US, Austria and France). Since foreign investors also accounted for 41% of the transactions on the sellers’ side, the balance of purchases and sales remained roughly equal over the year. The fixation on Core investments by most investors led to competition for the supposed “safest” properties. Since demand far exceeds the supply of these properties, and the new-building volume also remains at a low level, no significant increase in the supply of Core products can be expected. This particularly applies to the seven property strongholds. More than €15.65 billion was invested here in the past 12 months, accounting for 60% of the transaction volume. Compared to 2011, the transaction volume in the Big 7 increased by 28% and therefore considerably outperformed the market as a whole. Berlin was the top investment location in 2012. The sale of two top properties (KaDeWe and Neues Kranzler Eck) for a combined €800 million helped drive the total result to just shy of €4 billion. The commercial property investment market in the German capital therefore registered year-on-year growth of almost 90%. Munich (with around €3.9 billion, corresponding to 33% growth) and Frankfurt am Main (with almost €3.3 billion, corresponding to 7% growth) occupied second and third places. Stuttgart achieved the highest percentage growth (168%) and beat Cologne and Düsseldorf to take fourth place. Stuttgart’s unusually strong result was particularly helped by the Milaneo shopping centre deal. Investor interest in the Big 7 is traditionally focused on office property, and this asset class accounts for almost 60% of the transaction volume – well above the German average. Office property is also dominant in Germany with a share of 40%, but other usage types – particularly retail property with €7.9 billion or 31% of the volume – play a much stronger role outside the large cities. Mixed-used properties are next by some distance, accounting for a share of 11%. Around €1.7 billion was invested in distribution warehouses (share of around 7%), which represented the highest volume since 2008. On the buyer side, asset/fund managers formed the strongest group with an invested capital of around €7.1 billion (corresponding to a 28% share), followed by institutional investors such as insurers, pension funds and sovereign wealth funds (together with almost €3 billion, or a 12% share). The yields for Core properties remain low across all usage types. As a result of the strong demand for property used for retail, prime yields for shopping centres declined year-on-year by 25 basis points in 2012, reaching 4.75%. Office property registered a 12-month decline of almost 20 basis points to 4.76% at present. Yields for high-quality office properties with good tenants in good secondary locations are around 80 basis points higher than yields for Core properties in top locations. The strong demand for logistics properties caused a slight decline in prime yields over the year by almost 15 basis points to 6.85% at present. In 2013, prime yields are likely to stabilise at their current low levels for office as well as logistics and retail properties. “Whether the strong final spurt in December is a prelude to more adventurous behaviour by investors remains to be seen. If the property market follows the financial markets, however, then the first auction of German government bonds this year would indicate an increased willingness to take risks, as these found only few buyers,” says Pörschke. In concrete terms, a greater appetite for risk would mean that properties with some vacancies or with shorter remaining terms, or high-quality properties in locations outside the city centres, would also be seen as investment opportunities and would be included in investment strategies. In this event, the 2013 transaction volume is likely to reach a similar level to the 2012 volume. Interest rates should remain attractive for companies and debt-oriented investors. The continuing high risk premium (on the basis of 10-year German government bonds) also makes the case for an investment in German property this year. Raising loans for commercial property will continue to be challenging in 2013, however. Banks in particular are restructuring their property portfolios: new regulations such as Basel III have made them become more risk-averse. So-called debt funds are increasingly appearing for subordinate loans; these do not close the financing gap but narrow it nonetheless. Investment market for residential property portfolios remains buoyant “Activity on the residential property market is increasing further. In 2012 as a whole, a portfolio transaction volume (> 10 residential units) of around €11.1 billion was registered. This was therefore 70% higher than the volume in the previous year’s period. What’s more, 2012 marked a new five-year high: more than 200,000 residential units changed hands,” says Helge Scheunemann, Head of Research Jones Lang LaSalle Germany. German-wide portfolios accounted for a considerable share of the transactions. The four top deals alone accounted for €4.6 billion (LBBW-Portfolio, Baubecon, Hawk, DKB). At regional level, Berlin remained in the lead by some distance (€1.7 billion), ahead of Hamburg (€375 million), Munich (€290 million) and the Ruhr region (€270 million). The German residential property market appears extremely attractive particularly for foreign investors. Thus the share of foreign capital for this asset class has risen continually over the past three years to reach 38%. Public Quoted Property companies (38%) and asset and fund managers (28%) are the most dominant buyers. Private equity funds have an 11% share. Almost half of the sellers in 2012 were banks and insolvency administrators, followed by professional asset and fund managers (16%). The purchase prices increased strongly in some areas over the year. As a result, an increasing number of investors seeking corresponding returns are finding it necessary to consider the surrounding areas of the Big 7. Prime rental price index hits 10-year high – vacancy rate reaches 10-year low Activity on the office letting markets of the seven German property strongholds weakened slightly in 2012 compared to the previous year. Take-up of 3.04 million sqm was around 11% below the year-ago level. Only Frankfurt am Main registered strong growth in space take-up (+21%). Berlin recorded an almost unchanged result. Munich continued to be the market with the highest take-up, although it failed to reach the 800,000 sqm mark in 2012 after exceeding this level in 2011. “In spite of the growing economic uncertainty, the decline in letting activity did not worsen further. Here, the development of the labour market played a decisive role. The low average unemployment rate for 2012 also had a positive impact on the services sector, which is so important for the office property market. The situation could change this year, however: we forecast only a 0.8% increase in the number of office employees as a result of a more restrictive personnel policy at many companies, with consequences for the office property markets,” says Pörschke. “The decision-making processes are becoming noticeably longer. An even more critical eye is being cast over decisions to relocate and negotiations on lease contracts are more intensive. In addition, budgeting for a planned move represents such a huge burden for some companies that they are considering ways of increasing the efficiency of their existing spaces,” stresses Tschammler. For this reason, net absorption may weaken considerably in 2013 but will still remain positive. Ultimately, an increase in the occupation of space in office stock would still be recorded. Net absorption in the Big 7 reached just over 1 million sqm last year. This is more than 100,000 sqm lower than in the previous year, but is still around 30% above the five-year average. The new-building volume reached a five-year low of around 820,000 sqm in 2012, even though completions were higher in Düsseldorf, Cologne and Hamburg compared to 2011. Of the around 937,000 sqm in the pipeline for 2013, only around a third (321,000 sqm) is still available; the rest (616,000 sqm) has already been let or is occupied by owners. In view of the limited new-building activity, the proportion of vacancies with high-quality and modern fittings is expected to decline further. Less than 40% of the total vacancy volume currently falls into this space category. Total office vacancies in the Big 7 amount to almost 7.8 million sqm, which is around 7% below the volume recorded at the end of 2011. “The vacancy rate averaged across all seven property strongholds declined from 9.5% to 8.8% over 2012, with an above-average decline in Frankfurt am Main (-14.8%) and Munich (-12.5%). This is the lowest level since 2002. Should demand remain stable as expected, this level is also likely to be reached at the end of 2013,” says Scheunemann. The prime rents increased in almost all cities with the exception of Frankfurt (where they were unchanged at 33.00 Euro/sqm/month). The strongest growth was registered in Düsseldorf (+8.3%): due to the signing of several larger lease contracts in the high-price sector in the best location (CBD), the prime rent increased here to 26.00 Euro/sqm/month over the year. Aggregated across the Big 7, the prime rent increased by 3% (2011: 2.9%); average rents increased by 0.5%. “The prime rental price index produced by Jones Lang LaSalle therefore reached its highest level since 2002,” says the chief researcher. Based on the expected ongoing positive demand for such high-quality spaces in central locations, Jones Lang LaSalle is also forecasting further growth in prime rents in 2013 – albeit at a much lower rate (around 1%).
Helge Scheunemann, Head of Research Jones Lang LaSalle Germany
+49 (0) 40 350011 225
Timo Tschammler, Member of the Management Board Jones Lang LaSalle Germany
+49 (0) 69 2003 1110